Yesterday, Vice Chancellor Laster issued a 119-page post-trial opinion in In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation (Del. Ch.; 1/24) clarifying the standard of conduct and standard of review applicable to a controller’s exercise of stockholder voting power. The case involved a public company controlled by billionaire Eddie Lampert that was spun off from Sears Holdings Corporation and operated through two business segments. A special board committee had endorsed a plan to liquidate one segment and continue operating the other.
Lampert strongly opposed the liquidation plan and expressed his concerns to the company, while also negotiating with the committee to acquire the company as a whole. After the special committee rejected his offers, countered with an “inexplicable” proposal and indicated that it would proceed with the liquidation plan unless a deal was reached shortly, Lampert acted as controlling stockholder to remove two of the three special committee members from the board and amend the company’s bylaws to add procedural hurdles to the liquidation. The plaintiff minority stockholders alleged that Lampert breached his fiduciary duties in taking these actions.
VC Laster clarified the standards of conduct and review applicable under Delaware law before finding that Lampert did not breach his fiduciary duties in exercising his stockholder-level voting power:
Some authorities suggest a controller owes no fiduciary duties when voting. Other authorities apply a fiduciary framework without spelling out the details. This decision holds that when exercising stockholder-level voting power, a controller owes a duty of good faith that demands the controller not harm the corporation or its minority stockholders intentionally. The controller also owes a duty of care that demands the controller not harm the corporation or its minority stockholders through grossly negligent action. […]
Delaware decisions have not identified a standard of review that would apply when a court reviews a controller’s actions for compliance with a standard of conduct. […] The controller faced a subtle conflict, because while the actions he took affected all stockholders equally, he had business agreements with the corporation that could have skewed his judgment. That is a controller-oriented version of a situation where enhanced scrutiny should apply.
However, the special committee ultimately decided that the procedural hurdles made a quick liquidation impossible and reengaged with Lampert, consummating a transaction with both Lampert and a third party. Since the transaction involving Lampert eliminated the minority stockholders, the order applied entire fairness review. VC Laster found that, even though the actions Lampert took by written consent were consistent with his fiduciary duties, the fallout from those actions ended up making the subsequently negotiated transaction not entirely fair and required Lampert to pay $18 million to the minority stockholders.
This opinion is a must-read, not only for VC Laster’s review of Delaware precedent for the standard of conduct and review applied to the “controller intervention,” but also for his consideration of the transaction under the entire fairness test.
– Meredith Ervine